UBS has proposed replacing Switzerland’s pay-as-you-go first pillar pension system with a funded defined benefit (DB) scheme and transforming the second pillar into a pure defined contribution (DC) system, in what industry representatives describe as a fundamental shift that would increase competition among pension funds while transferring more risk to members.
Under the proposal, the pay-as-you-go state pension (AHV) would become a funded DB scheme, reducing reliance on demographic trends while improving benefits.
James Mazeau, one of the authors of the UBS study: A contribution to the debate on a more sustainable Swiss retirement system, told IPE that the AHV, managed by Compenswiss, was not designed to rely structurally on its buffer fund to finance pension payments.
The current size of the fund broadly corresponds to one year’s pension payouts, with the buffer fund used to cover financing shortfalls, he said.
Mazeau added that pension payments are expected to increase while the buffer fund is projected to shrink to around half its current size over the next decade, citing projections from the Federal Social Insurance Office (FSIO).
According to UBS, government-backed guaranteed returns would protect members from market volatility.
For the second pillar, UBS proposes replacing the current hybrid DB-DC framework with a pure DC system, allowing members to choose both their pension fund and investment strategy.
“A pure DC scheme would create more intergenerational fairness. Members would be more exposed to the volatility of financial markets but could better adjust the asset allocation to their personal needs,” added Elisabeth Beusch, another study author.
Beusch said existing pension funds would continue to operate under the new system, with increased competition potentially leading to market consolidation.
She added that Switzerland’s second pillar is among the most fragmented occupational pension systems in the OECD.
Industry reactions
The Swiss Pension Fund Association (ASIP) said abandoning the current combination of a pay-as-you-go first pillar and funded occupational pensions financed by employers and employees would be a mistake.
ASIP director Lukas Müller-Brunner said the proposed reforms would sacrifice the benefits of risk diversification across the two pillars.
He also argued that the systemic shift proposed by UBS would be prohibitively expensive.
The UBS study estimates that tax revenues would need to increase by around 18% during the transition to the new system.
“For this reason, the UBS proposal is also highly unrealistic from a political standpoint,” Müller-Brunner said.
Roger Baumann, partner at consultancy c-alm, said the pay-as-you-go system remains “the most efficient way” to ensure a basic standard of living.
Baumann also said it is “fundamentally wrong” to assume that giving members greater freedom to choose pension funds and investment strategies in the second pillar would automatically improve retirement outcomes.
“It is only because of the rigidity of the system that capital market risks are smoothed across generations, which makes members willing to bear the investment risks,” he added.
Nico Fiore, managing director at inter-pension, the organisation representing multi-employer pension schemes, said the proposal to fully fund the AHV was interesting but raised far-reaching financial and political questions.
“In particular, financing the transition and structuring the governance would be challenging. In our view, the focus should therefore be less on a fundamental restructuring of the first pillar and more on strengthening the proven combination of pay-as-you-go and funded systems for the long term,” he said.
Fiore added that greater freedom of choice in the second pillar “sounds appealing at first glance” but, in practice, raises questions about whether such a model “would fundamentally alter the nature of occupational pension provision” designed as a collective social insurance scheme.
